By Barani Krishnan
Investing.com - Oil has started the year with a boom, ending the first week with a gain of nearly 8%, as OPEC kingpin Saudi Arabia continued with its lower-for-longer supply strategy.
Since the Kingdom's Tuesday announcement that it will cut an additional million barrels per day from its production in February and March, the oil market’s attention has been almost entirely on the potential for reduced global supplies.
Helping oil bulls, however, was an oversized final U.S. weekly crude draw for last year that came in at 8 million barrels — more than three times the level forecast — due to destocking by those unwilling to be taxed on those barrels and a pick up in U.S. oil shipments to China.
Further boost to crude prices came from the annual rebalancing by commodity funds to match the requirement of indexes they are benchmarked against — an exercise that began Friday and could result in the purchase of some $9 billion of oil contracts over the next week.
Still, analysts expect the market to turn back to fuel demand issues in the coming weeks, and also to how well the U.S. and the rest of the world are coping in their recovery from the Covid-19.
“If you told me you wanted to buy crude today because of the commodity rally we are seeing, or the USD weakness, or inflation fears as the 10-year bond rate is going up every day, I would encourage you,” said Scott Shelton, analyst at ICAP (LON:NXGN) in Durham, North Carolina. “If you told me that you wanted to buy oil because the market is about to see 150,000 contracts of buying? I would cringe at the concept on the basis of past history of trading rebalances,” Shelton added, referring to the index rebalancing exercise.
New York-traded West Texas Intermediate, the key indicator for U.S. crude, settled Friday’s official session up $1.41, or 2.8%, at $52.24 per barrel. For the week, WTI rose $4.62, or nearly 7.7%, for the biggest weekly gain since November.
London-traded Brent, the global benchmark for crude, gained $1.61, or 3%, to finish Friday’s official trade at $55.99. For the week, Brent rose $4.19 or 8%.